HHS

Harte-Hanks, Inc. 10-Q Summary: Period Ended June 30, 2010

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for Harte-Hanks, Inc., a worldwide direct and targeted marketing company, for the period ended June 30, 2010. The company operates through two primary segments: Direct Marketing (providing multichannel marketing services) and Shoppers (owner and operator of shopper publications in California and Florida). The company reported 63,621,968 shares of common stock outstanding as of July 15, 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 3.7% in Q2 and 5.9% in the first half of 2010 compared to the prior year. Both segments contributed to the decline: Direct Marketing revenues fell 3.0% (Q2) and 5.7% (6 months), while Shoppers revenues fell 5.2% (Q2) and 6.2% (6 months). Declines were attributed to difficult economic conditions, reduced client marketing budgets, and circulation curtailments in the Shoppers segment.
• Profitability Improvement: Despite revenue declines, Net Income increased 2.7% in Q2 and 19.9% in the first half of 2010. Operating income decreased 9.5% in Q2 but increased 5.7% for the six-month period.
• Expense Management: Operating expenses decreased 3.0% in Q2 and 7.0% for the six months ended June 30, 2010. Significant cost reductions were achieved in the Shoppers segment (down 8.5% in Q2) due to headcount reductions, lower paper costs, and facility consolidations. Interest expense dropped significantly (72.8% in Q2) due to the expiration of an interest rate swap in September 2009 and lower debt levels.
• Segment Performance: The Shoppers segment saw a dramatic improvement in operating income, rising 66.2% in Q2 and 1,272.5% for the six months, driven by cost cuts. Conversely, Direct Marketing operating income declined 19.1% in Q2 and 16.1% for the six months.

Outlook, Risks, and Contingencies

• Economic Outlook: Management notes that the difficult economic environment in the U.S. and abroad continues to impact marketing expenditures. While slight improvements were seen in recent quarters, 2010 is expected to remain challenging. The company believes structural changes have positioned it well for an improved environment.
• Liquidity and Debt: The company holds $83.8 million in cash and has $112.2 million of unused borrowing capacity under its Revolving Credit Facility. However, this facility matures on August 12, 2010. Management expects to obtain a replacement facility but notes that credit market disruptions could impact liquidity.
• Legal Contingency: The company reached an agreement in principle to settle a class-action lawsuit regarding employee expense reimbursement for $7.0 million. The full amount was accrued in the fourth quarter of 2009. The settlement is subject to court approval.
• Operational Risks: Risks include potential increases in postage rates (a proposed 5.6% increase for 2011) and newsprint prices. The company continues to evaluate circulation reductions in California and Florida to address economic conditions.

Investor Verification Checklist

• Debt Refinancing: Verify the status of the $125 million Revolving Credit Facility maturing in August 2010 and the terms of any replacement facility.
• Shoppers Segment Viability: Monitor the impact of continued circulation reductions and potential postage rate hikes on the Shoppers segment's profitability.
• Direct Marketing Verticals: Assess the recovery trajectory of the high-tech and pharma/healthcare verticals, which experienced revenue declines.
• Legal Settlement Finalization: Confirm the final court approval of the $7.0 million class-action settlement.
• Working Capital Trends: Review Days Sales Outstanding (DSO), which increased to 59 days in Q2 2010 from 56 days in Q2 2009.